May 30, 2024

Everything You Need To Know About Multisig Wallets

Everything You Need To Know About Multisig Wallets

Multisig wallets, also known as multisignature wallets, are cryptocurrency wallets that require multiple signatures to approve and execute transactions, rather than just one.

Each signature used to authorise a transaction is associated with a different private key and the wallet has an already predefined  minimum threshold of signatures required to sign before a transaction is approved  

Multisig wallets eliminate the single point of failure inherent in traditional single-key wallets. This is particularly crucial in corporate settings, where a single point of failure, such as an incident of private key compromise, can have significant effects on the organisation potentially leading to loss of assets.

See: Poloniex Hacked: Justin Sun’s Exchange Loses $126 Million To Crypto Theft  

How Multisignature Wallets Work

Image credit: Cointelegraph

Multisig wallets operate by requiring two or more private keys to execute a transaction. Using smart contracts, multisig wallet owners establish and agree upon access rules, including the minimum number of keys required and who the authorised signatories are. When setting up a multisig wallet, users must define the following parameters: 

  • Number of authorised signatories 
  • Number of required signatures 
  • Public keys of each consigner

Once a multisig wallet is set up, authorised signatories receive notifications when transactions are initiated. They then have the option to approve transactions by providing their signature. 

The multisig smart contract validates these signatures against the public keys provided during the creation of the smart contract and only executes the transaction when all predefined conditions are met.

Types of Multisignature Wallets 

M-of-N Multisig Wallets

This type of multisignature wallet requires a specific subset of signers to approve a transaction out of a total number of signers. It has a total of "N" private keys. Still, it necessitates a predefined minimum for authorisation, where a subset of "M" keys out of the total "N" is required to approve and execute a transaction. For instance, a wallet might be configured to demand 2 out of 3 or 3 out of 5 private keys.

N-of-N Multisig Wallets 

This multisig wallet setup requires all co-signers to validate a transaction before it is executed and processed. For example, in a two-of-two method or a three-of-three method, all parties must sign with their private keys for the transaction to be considered valid

Benefits of Multisig Wallets

Some uses and benefits of multisig wallets include the following:

Reduced single point of failure: Single-signature wallets are vulnerable to a single point of failure, which is the private key to the wallet. Once this key is missing or misplaced, the user cannot access the wallet. 

Multisignature wallets eliminate this risk by distributing multiple private keys across holders. Additionally, multisig wallets remove the risk of "key person/personnel elimination." For example, QuadrigaCX, a crypto exchange, lost over $104 million worth of users' assets when the founder, who was the only person with access to the company’s private keys, died.

Institutional use/collaborative ownership: Multisig wallets offer a practical solution to institutions such as cryptocurrency exchanges, decentralised applications, financial services, DAOs, etc., which have several key individuals or teams managing large sums of cryptocurrencies. 

Having multiple cosigners to authorise transactions not only increases security but also promotes collaboration and transparency within the organisation, reducing the risk of misappropriation of funds

Customizability and adaptability: Multisig wallets are implemented as smart contracts. The utilisation of smart contracts enables multisig wallets to be both programmable and customizable. For instance, users can configure a multisig wallet to require only two out of three signatures to approve transactions or to modify the wallet by adding or removing cosigners. This adaptability makes multisig wallets suitable for various user circumstances.

Disadvantages of Multisig Wallets

Technical know-how: Setting up a multisig wallet requires more than just basic wallet security knowledge. Users need to understand various technical details to choose the option that best suits their needs. 

Additionally, setting up a multisig wallet involves some technical knowledge due to the number of keys and recovery phrases needed. These requirements may be relatively complex for the average crypto investor or those who are new to crypto. 

Transaction speed and cost: Multisig wallets necessitate multiple signatures for transaction approval, prioritizing security over speed. Users opting for multisig wallets should anticipate potential delays, with transaction execution ranging from minutes to hours or even days, factors such as the number of signatories and geographical location can influence transaction speed. Furthermore, transactions involving multisig wallets typically incur higher gas fees when the gas paid by all cosigners is factored in compared to those made with single-key wallets.

The Bottom Line 

Multisig wallets significantly bolster the security and safety of crypto assets by involving multiple parties in transaction approvals. 

However, when establishing multisig wallets, users must ensure that the requisite number of private keys required for transaction approvals are not solely controlled by one party or entity. Failure to do so renders the wallet vulnerable to a single point of failure, essentially negating its security advantages over single-key wallets. 

This vulnerability was exemplified in one of the largest crypto hacks in history when the Ronin bridge fell victim to a $625 million exploit due to a compromised private key. 

While multisig wallets offer robust security enhancements to crypto wallets, they are not the only wallet security solution. 

Account abstraction is another wallet security enhancement solution that is gaining prominence, particularly within the Ethereum ecosystem as it provides an additional layer of security for crypto assets.

See: ERC- 4337: What Is Account Abstraction In Crypto 

[Author’s Note: This article does not represent financial advice, everything written here is strictly for educational and informational purposes. Please do your own research before investing.]

Author: Godwin Okhaifo

Also Read: Understanding And Preventing Address Poisoning Scams